Wall Street analysts earn their keep examining data and projecting
likely outcomes. But when it comes to the endgame of the U.S. Department of
Justice's suit to block the merger between American and US Airways, projections
are more like guesses.
Sure, there are only two potential results: either the
carriers merge (perhaps after agreeing to concessions) or they don't. While the
former previously was viewed as a virtual lock, analysts now are mixed in the
wake of the suit. The consensus view seems to be a coin toss.
Analysts at JP Morgan and Morgan Stanley largely dismissed
the theory that DOJ is using the bold tactic of a lawsuit to extract major
concessions from the airlines, assigning a higher probability that the case
would proceed to trial.
"That’s not to say that a negotiated settlement which
includes carve-outs is impossible at this point, but that the carve-outs the DOJ
would likely be looking for would be significant and material," according
to Morgan Stanley analysts.
Indeed, if DOJ simply was looking for slot divestitures at
Ronald Reagan Washington National Airport, previously viewed as the most likely concession to get the deal done, it probably wouldn't go so far as filing
a lawsuit to get them.
Any settlement in the American-US Airways suit,
according to Wolfe Trahan analyst Hunter Keay, would involve not only
"major divestitures" at that airport but other unspecified
"behavioral remedies." The DOJ suit's focus on connecting
markets, bag fees and US Airways' Advantage Fares program—unusual in
regulatory assessment of airline mergers—raises the bar on concessions
regulators potentially would seek from the airlines.
Yet, Keay in a research note likened the suit to one
brought by DOJ this year to block AB InBev and Modelo from merging and gaining
what regulators deemed to be anticompetitive share of the U.S. beer market. DOJ
and the brewing giants within three months settled the suit on the condition
that the companies divest Modelo's U.S. business.
Failing to settle, DOJ and the airlines would head to
court. They're already preparing for battle. DOJ's complaint last week was the
opening salvo, and the airlines should reply to DOJ's complaint within 21 days.
Beyond that, trial timing is uncertain but will take "months,"
according the airlines.
DOJ's success in blocking mergers through the courts
is spotty. "Since 2004 DOJ has won only one antitrust case in court,"
Keay wrote in a research note. That was in 2011, when a judge sided with DOJ to
block a merger between H&R Block and Tax Act, according to Keay.
"Settlements in these types of cases was the usual
outcome, and when the judge rules that's usually bad for DOJ," Keay noted.
Morgan Stanley analysts aren't as optimistic about an
outcome favoring the airlines, estimating that they have about a 30 percent
chance of "successfully" litigating against DOJ. Their definition of "success"
meant "a deal occurring with no or immaterial concessions."
"Though all admit that benchmarking such situations is
difficult, most legal professionals we have spoken to on the subject assess the
chance of success to be a 'low probability event' to which we assign a 10
percent probability," according to Morgan Stanley. Yet, "a broader
group of professionals," such as M&A experts and airline industry executives,
"assess the situation as a 'coin flip' to which we assign a 50 percent
probability." The analysts' 30 percent likelihood estimate splits the
difference.
At least publicly, the airlines are confident they can
prevail in court and consummate the merger.
Cowen and Company airline analyst Helane
Becker seems to concur. "We believe the airlines have a good case against
the DOJ ruling," she wrote in a research note. "If this merger is
blocked it essentially creates a duopoly between Delta and United."
Still, to others, an outcome that results in the once-certain
merger is a matter of heads or tails. Buckingham Research Group airline analyst
Daniel McKenzie in a research note following the DOJ suit assigned "a
50/50 probability of the merger closing."